Revaluation of Asset
The purpose of asset revaluation may be the sale of the asset to another business unit, a merger or acquisition of the company, etc. The adjustment may be upward or downward depending on the fair market value of the fixed asset, i.e., the revaluation may reflect both the appreciation and the depreciation in the value of the fixed asset.
To understand revaluation meaning, Fixed and intangible assets are reassessed for their current market worth. The cost of an asset in the revaluation model may be changed, based on its fair value, either upwards or downwards. When assets are revalued, a new reserve is put aside and given the designation "Revaluation Reserve." The revaluation reserve became more extensive as the value of assets rose, and it shrank when their worth fell. Then, the tangible and immovable assets are reevaluated.
Causes of the Revaluation
Businesses may benefit from the revaluation concept by using it to:
Get anything ready for sale to another firm.
You should bargain for a reasonable price before merging with or being purchased by another firm.
Exhibit the current market worth of appreciated assets, such as PP&E, that were acquired at a discount.
If you want to avoid any unpleasant surprises when the time comes to replace your fixed assets, you should plan.
Revaluing an Asset and Accounting for It
If the revaluation accounting is used and the carrying amount of a fixed asset increases as a consequence, the excess from the revaluation is recorded as a rise in other comprehensive income and added to equity as a separate account called "revaluation surplus." Gains from revaluations are usually excluded from profit or loss, but they must be included if they offset losses from previous revaluations of the same asset (thereby erasing the loss).
It would help if you showed the reduction in the carrying amount of a fixed asset due to a revaluation of fixed assets. Recognise the drop in other comprehensive income unless there is a credit balance in the revaluation surplus related to that asset. Any revaluation excess reported in equity is reduced by the amount recorded in other comprehensive income.
The excess from the revaluation of a depreciated fixed asset should be added to retained profits. The difference between the depreciation calculated using the asset's original cost and the depreciation figured using the asset's revalued carrying amount is the amount of surplus that is transferred to retained earnings.
Example to Better Understand the Revaluation
For the revaluation account example, If a company invests 100,000 dollars in machinery in 2015, anticipating that it will serve its needs for the next decade, the return on investment (ROI) will be 100,000 dollars. After realising they were about to be acquired by a bigger firm in 2017, the corporation reevaluated its holdings to get a good deal.
The value of the machinery has risen to 12,000 dollars. Therefore, on the income statement, the revaluation excess is credited with 2,000 dollars.
Since the equipment has a remaining useful life of 8 years, the annual depreciation expense will be 1,500 dollars from here on out (12,000 dollars divided by 8 years) with the help of the revaluation account format.
Since a revaluation establishes the current worth of a company's holdings, it is prudent for an entity to review and perhaps increase the value of its assets periodically. This is because an entity may then claim a more significant portion of the resulting depreciation against its taxable income.